Doug Smith President/CEO – Little Red Services

Government Affairs Chair – Alaska Support Industry Alliance

Background

Impact to Member Companies

Observations

Questions

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Alliance members, at their own expense, have traveled to Juneau more than 10 times during the 27th Alaska Legislature

We have consistently advocated for significant tax reform

Members and their employees have participated in every public testimony opportunity in 2011/2012

The McDowell Report confirmed the facts we’ve presented

Alliance companies average between 70% and 90% Alaska hire

Alliance companies employ non-residents who were formerly long-term Alaska residents

Record employment on the North Slope has not led to a reduction in the production decline

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The Alliance is comprised of 460 member businesses

35,000 employees

Our membership is comprised of businesses in 43 different sectors from Automotive to Welding

Our mission statement is to “promote responsible exploration, development and production of oil, gas and mineral resources for the benefit of all Alaskans”

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Continued decline in projects

Three largest fabrication shops in the state are currently

operating at a loss, with little to no work, in order to keep core employees on staff

Alaskan companies are looking for work, resulting in many relocating or shifting resources and investment to the lower 48 (CIRI, Solsten, Fairweather, Builders Choice, Northern Industrial Training, Carlile, Lynden, Peak Oilfield Services, Cruz Construction…)

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As indicated in the McDowell study, record high employment on the North Slope does not represent a thriving oil industry

2000 – 108,000 barrels of annual production for every job

2010 – 28,000 barrels of annual production for every job

Loss of highly trained professionals to outside competition

Reduction of jobs based in Anchorage and Fairbanks like engineers, fabrication work, etc.

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Letter in your committee packet

Relocating an asset from production-related activity to maintenance activities that do not increase production

Financing

Banks outside of Alaska are concerned about our current tax policy and its potential impact on future financial forecast of our service company

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Oil tax reform must address the following: Existing light oil production

New light oil production

Viscous

Exploration New companies and investment in the Alaska

market

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Existing production

Low-cost light oil (existing production)

“Government take of 70-75% is reasonable. It is maybe slightly on the high side.” (PVM slide 28, presentation to Alaska Support Industry Alliance)

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New production The allowance for production increases in CSSB 192 does

not reflect the recommendation of Dr. van Meurs: “the 60-65% government take for more costly new light oil resources as proposed in HB 110 and HB 17 is a reasonable level from an international perspective.” (PVM slide 38)

Dr. van Meurs includes in-field drilling of existing fields as new high-cost light oil production (PVM slide 16)

Dr. van Meurs “The main reason for major companies to be in a harvest mode is that projects outside Alaska are more attractive. No large attractive projects available in Alaska under current fiscal terms for major oil companies” (PVM slide 15)

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New Production, continued…

Both Gabon and Trinidad applied an approximate 12 percent drop in order to attract new investment in an effort to offset declining production (PVM slide 31)

Marginal government take in Gabon at $100/bbl is 52%

Marginal government take in Alberta is 57%

Marginal government take in Alaska under ACES is over 80% (PFC Energy, slide 49)

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Viscous (called heavy by Dr. van Meurs)

Dr. van Meurs “To be competitive Alaska would have to offer government takes for heavy oil at 55-60%.” (PVM Slide 42)

Exploration

Tax credits have stimulated significant exploration this season

Will this result in the required investment to bring new discoveries to production under the current ACES tax structure?

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New companies in the Alaska market

CSSB 192 does not simplify our tax structure for

companies looking to invest in new markets and it does not make us competitive for new projects

ACES does not compete well when developing higher cost light oil (PVM slide 37)

“ACES inhibits the development of new projects and resources that might help stem or even reverse decline.” (PFC slide 28)

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There is probably a point where industry and the State share the pain of low prices

Industry should not have to give up total profits to taxes

The State treasury should not collect zero tax at low prices

A healthy partnership should exist on both ends of the price spectrum

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Decoupling may be in the State’s best interest if it is revenue-neutral to industry

The Alliance feels this bill, in its current form, does not go far enough to encourage a significant shift in investment

Although we have touched on several points from Dr. van Meurs on different types of production and corresponding tax rates it would be difficult to implement the approach

The method and levers to be adjusted is the challenge before the senate but we support a magnitude of change that would place us in the middle of a comparative chart produced by PFC Energy

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